Fundamental Legal Issues in the Oil and Gas Industry IV: The Concession & Risk Service Contracts

After discussing the production sharing contract in the last episode, this article reviews the other two commonly used petroleum development regimes the concession and the risk service contracts.

The Concession The concession was the principal its form of petroleum form was

development recorded in

agreement 1901 in

and Iran

first

known

(the

D’Arcy

Concession).

Concessions are still widely used, albeit in a very different form from the D’Arcy concession and others granted in the periods following shortly afterwards. Commentators typically classify the concession concession into and two the broad modern categories the The

traditional

concession.

former representing the D’Arcy type concessions and the latter representing the newer concessions now in use. This classification would also be used in this article.

The Traditional Concession The traditional concession was characterised by the grant of large tracts of land for (sometimes the whole of a country) for long periods of time (ranging from 60 to 99 years) and

with

virtually

no

control

over

the

activities

of

the

concessionaire by the State. Additionally, the State’s primary financial benefits came only in the form of royalties. Indeed royalties were charged on the basis of a flat rate per ton of the petroleum produced and was not indexed to the price of the petroleum in the market. The concessionaires were not obligated to drill in any of the land which had been conceded to them nor were they required to relinquish the property in the position that they did not undertake exploration or

drilling. These traditional concessions were entered into by a number of countries. The D’Arcy concession in Iran granted William D’Arcy the exclusive rights to search for and produce oil over almost 500,000 square miles of Southern Iran for sixty years. In exchange the Shah of Iran and his government were given a “bonus” of US$100,000 and shares of an equal value in D’Arcy’s oil company and a 16 per cent royalty. Similarly, the ruler of Abu Dhabi granted a 75 year

concession for the whole of his country. In Nigeria, the ShellBP consortium was granted a concession covering the entire mainland of Nigeria.

The traditional concession was a reflection of its time. Most of the countries where these concessions were granted were often under some the form of colonisation lacked the or the other. legal

Additionally,

countries

requisite

structures to govern such matters as petroleum operations. This created an environment where the interests of the countries were subordinated to those of the oil companies.

The Modern Concession The modern concession arose as a result of greater

awareness from the oil producing countries of the injustices engendered in the existing concession regimes. Beginning in the fifties, a number of countries sought to renegotiate their concession terms, introducing new elements, which

significantly altered the balance in the concession regime. The major changes however, arose after the formation of the Organisation of Petroleum Exporting Countries (“OPEC ”). The organization was established in 1960 and one of its main aims was to “gain complete control of the hydrocarbon industry in its sovereign territories.” In 1968 and 1971, OPEC made resolutions XVI. 90 of 1968 and XXIV 135 of 1970. These resolutions enjoined member states to procure

participation and control in the exploration, exploitation and development of their petroleum resources. The formation of OPEC was key to the strengthening of the oil producing countries in their negotiations with the oil companies. The states shared information about the nature of the

arrangements being offered by the oil companies as well as

the kinds of abuses being perpetrated by the companies under the traditional concession system.

The renegotiated concessions now gave the State a greater take in the oil produced in the territory, control over the operations of the oil companies, covered smaller areas, were granted for shorter periods, included requirements to

relinquish when oil and gas was not discovered or produced, amongst other terms.

Nigeria’s OML as a Modern Concession The Oil Mining Lease (“OML”) provided for under the

Petroleum Act of 1969, particularly as it operates under the participating joint venture (“PJV”) structure is an example of a modern concession. Unlike the concession initially granted to the Shell-BP consortium, under the provisions of the law the area which an OML may cover is limited to ***. The Petroleum Act also limits the term of an OML to twenty years. The Act however provides that this term may be renewed. The Act also requires that one-half of the area of the lease must be relinquished ten years after the grant of an oil mining lease.

The Risk Service Contract

The risk service contract (“RSC ”) is in many ways similar to the PSC. Under the RSC arrangement, the National Oil

Company (“NOC ”) holds the right to produce, whilst the multinational company acts as a contractor. Similar to the PSC, the contractor provides the funding and technical

expertise required to explore and exploit the oil. In return, the contractor is reimbursed from the revenue derived from the sale of crude oil produced from the field. Unlike the PSC, the contractor is paid in cash, and does not have title to the oil produced. The contractor may however be granted an option to buy back the crude oil produced from the

concession, as in the Nigerian RSCs.

In the 1970s NNPC entered into RSCs with three companies – Agip Energy and Natural Resources Limited, Elf Aquitaine Nigeria Services Limited and Nigus Petroleum. Recently,

NPDC entered into such a contract with Agip Energy and Natural Resources Limited.

Concluding Remarks Whilst the concession, PSC and RSC, differ in form, as a matter of substance, these petroleum development

contractual regimes may be used to achieve the same ends. Indeed certain terms have now become commonplace in the industry and are utilised across the different contractual

structures. These common terms form the subject of the next article.

Adeoye Adefulu holds a Ph.D in oil and gas industry reform from the Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee. He is a partner in the law firm of Odujinrin & Adefulu e s t
1972.

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